As many employers know from recent experience, downsizing is expensive, both in terms of severance payments and wrongful dismissal lawsuits. One common strategy to reduce or even eliminate litigation costs is to make the payment of severance conditional on signing a release.

Most believe that if an employee signs a release, an employer can always rely on it to thwart any legal proceeding brought by the employee. Like any contract, however, a release can be set aside if the Court concludes that it is “unconscionable”. This happened in the recent decision Rubin v. Home Depot Canada Inc., 2012 ONSC 3053.

Mr. Rubin was 63 years old with 20 years’ service when he was terminated. His termination letter offered him 28 weeks’ severance, which would only be paid if he signed a release within one week. Home Depot did not verbally tell Mr. Rubin that he could take a week to seek legal advice before signing the release, and so he signed the release at the meeting. Mr. Rubin later sued Home Depot, claiming that the release was unconscionable and should be set aside.

The Court agreed with Mr. Rubin. The Court explained that four elements must be met to set aside a contract for being “unconscionable”:

1. a grossly unfair and improvident transaction;
2. victim’s lack of independent legal advice or other suitable advice;
3. overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other disability; and
4. other party knowingly taking advantage of this vulnerability.

The Court concluded that it was grossly inadequate to offer only 28 weeks’ severance to Mr. Rubin. The Court also concluded that Mr. Rubin did not have independent legal advice. The fact that the termination letter said he had one week to sign the release was not sufficient because Home Depot did not verbally tell Mr. Rubin that he could take a week to seek legal advice before signing. The Court then cited a large body of case law stating that there is an inherent imbalance in bargaining power between employees and employers. Lastly, the Court concluded that Home Depot had taken advantage of Mr. Rubin. The Court found that Home Depot had misled Mr. Rubin into believing that the severance being offered was his maximum entitlement. Home Depot did this in two ways. First, the letter told Mr. Rubin that 28 weeks’ severance exceeded his entitlements under the Employment Standards Act, 2000 (“ESA”) (it did, but only by two days’ pay). Since the letter did not refer to Mr. Rubin’s common law entitlements to reasonable notice, it gave Mr. Rubin the incorrect impression that he was receiving more than what he was entitled to. Second, the letter suggested that he would not be paid if he did not sign the release. This was false because the ESA required Home Depot to pay almost the entire amount to Mr. Rubin irrespective of whether he signed the release. The Court therefore set aside the release and awarded 12 months’ salary to Mr. Rubin.

In light of the Rubin case, employers should consider the following practical tips when seeking a release from a dismissed employee:

1. Don’t “oversell” the severance package. The best way to avoid overselling the severance being offered is to ensure the termination letter clearly sets out the employee’s minimum statutory severance entitlements, and then explains what amount the employer is prepared to pay above those minimum entitlements in exchange for a release.
2. Tell the employee to take time before signing. Rubin makes it clear that having the termination letter say an employee has time to consider the release before signing is not enough. Make sure that the person conducting the termination verbally tells the employee this at the meeting. In fact, the best practice is to not allow an employee to sign a release at the termination meeting.
3. Offer to pay for legal advice. It will be a very rare case where a Court will set aside a release that is signed by an employee after he receives legal advice. Some employers offer to contribute a nominal amount (usually $500.00) to have the severance package and release reviewed by the employee’s lawyer. While this practice does increase severance costs, the expense is relatively small, and the practice tends to reduce the risk of a lawsuit. Given the high cost of litigation, in the end this practice often decreases your overall legal costs.